Early Warning System

For every company that carefully and systematically observes and analyzes its environment, its competitors and the market, an emergency may present an opportunity, because early detection of symptoms that signal upcoming changes enables the company to react to these changes in a strategic way. Otherwise, if a company does not monitor its environment, an emergency poses a threat. Overlooked changes may lead to the collapse of the biggest players, just like the above-mentioned frog, which placed in a pot of cool water does not notice that the temperature is rising, so it fails to jump out of the pot, when it still can.

The mechanism that helps to notice significant changes in the environment is called an Early Warning System (EWS). It relies on the identification of the so-called weak signals of change. The EWS helps companies to prepare for potential scenarios that might develop and it provides a lot of information about the environment, including its various elements and actors. EWS is not a computer software. It is a set of management methods, which help to follow and critically analyze changes in the environment and that support adequate decision making aligned with the strategy of the company. These decisions are meant to address the changes that occur in the environment, in such a way that they strategically position the company and ensure that the company maintains is market relevance.

Ignoring the dynamically changing environment may be catastrophic for a company. “Icebergs” that appear on the horizon may “sink” even the biggest players considered to be unsinkable. Some changes may even modify the rules of the game in some industries. Balancing robot dogs, self-driving vehicles, product delivery by drone, a software that can detect depression, “smartphonized” social life, the development and popularity of computer gaming, 3D print, the sharing economy, and digital pills that communicate with physicians ‒ these are only some examples of phenomena that are happening right now around the world. Some of these phenomena occurring in the environment may play a role of disruptors for many branches of industry. For example, the dynamic development of computer gaming, manifested by a huge number of players around the world, estimated at over one billion people, is changing not only the gaming industry, but the marketing industry, which now has access to another significant advertising medium.

Overlooking changes in the environment may lead to the collapse of a company, although in many cases it is not the only, but one of many reasons. The analysis of actual case studies related to corporate downfalls, resulting from market changes, is very interesting and educational. For example, Compaq failed to notice that Asian manufacturers of so-called computer clones can offer product quality acceptable to customers. Blockbuster overlooked the development of the Internet and the Video on the Demand (VOD) model. Polaroid was blind to the fact that digital photography is gradually making analogue photography obsolete and Kodak erroneously assumed that digital photography does not provide the same quality as analogue photography. Blackberry failed to notice in time that people prefer touch keyboards to 3D keyboards. Best Buy decided that no one would shop for a television online and the company missed the entry onto the e-commerce market. However, the most interesting example of a company, which found itself in deep trouble, because it ignored trends and market changes, is Nokia. Although we do not know all the details, Nokia seems to be a classic example of a “slowly boiled frog”, which failed to jump out of a pot at the right moment. In 2013 during the press conference organized to announce the sale of the mobile phone branch of Nokia to Microsoft, Nokia’s CEO Stephen Elop said: “We didn’t do anything wrong, but somehow, we lost”. This example clearly shows that the company does not have to make any drastic strategic moves, but “merely” ignore its environment, to sooner or later lose its competitive advantage and in consequence collapse.

The goal of the Early Warning System is to register weak signals in the company’s environment, in order to detect anomalies and warn against unexpected changes (scenarios). The Early Warning System that is used in business may be compared to the EWS used to warn people about tsunamis. Simply put, a tsunami EWS consists of a network of sensors located in various areas of the ocean, which constantly monitor the situation and detect the so-called weak signals characteristic for the development of a tsunami. When certain results exceed the defined norms, the authorities order an evacuation from the territory under the tsunami threat. In this situation, we have a specifically defined scenario of a future event development (tsunami). There are defined methods of measurement, critical levels, evacuation plans, etc.

If a company does not have an EWS, the reaction to changes in the environment will be delayed at best, if it happens at all. At first, weak signals appear, but they are not registered by the company. Next an event, which probably is noticed by the company, occurs, however at the same time, implications of another event become visible and competitors enter the game (assuming they don’t have an EWS). A company’s strategic move takes place at the very end of this chain of events and it usually is of a defensive, rather than of an offensive, nature.

However, in case of companies which do have an Early Warning System, the chain of events is completely different. At the beginning, the environment sends weak signals. The company registers these signals and evaluates them. If senior managers deem the signals important, the company implements specific strategic moves, before the major event and its implications occur. The competition on the other hand is late in reacting to the major event (again assuming that the competitors do not use EWS).

Every company must define for itself the significant events and scenarios that impact its development and the future and it must also define the weak signals for each of these events and scenarios, because these two elements are the foundation of a well-functioning EWS.

Figure 1: Differences between companies with and without EWS (based on The Handbook of Market Intelligence, by Hedin, Hirvensalo, and Varnaas, 2014))

Early Warning Systems are based on scenarios that predict the development of various situations or scenarios of the future. They are developed with the use of more or less complicated methods. Mature organizations usually employ several scenario development methods. Some of these methods include: the pre-mortem analysis, what if analysis, alternative futures analysis, multi-scenario analysis (one-, two- or multi-dimensional), cross-impact analysis, trend and mega-trend analysis, strategy war-game simulations, and the dynamic analysis of strategic groups.

Next, companies identify the indicators of weak signals for each of the developed scenarios. The indicators must be carefully thought through. In his book, Competitive Strategy, Michael E. Porter lists some examples of weak signals, such as: announcements of strategic moves by competition, disclosing information after a strategic move, open discussions about the current situation in the industry, discussions and explanations related to various strategic moves, the way companies initially implement significant changes, discrepancies between previous goals and norms, “battling” brands and law suits.

Once the scenarios and indicators are defined, the company begins a regular practice of environment scanning. It is done in a systematic, focused and structured way. Usually, scanning of the whole environment is not efficient due to limited resources that can be assigned to other tasks. Regular scanning does not necessarily mean daily scanning. Some parts of the environment can be scanned every six months and others on weekly basis. Various indicators can be updated as required to ensure the effectiveness of the system. If an anomaly is detected, the EWS team informs the management board, which in turn oversees the implementation of strategic moves at the right time. The strategic moves aim to maintain or strengthen the competitive advantage of the company, in the context of changes occurring in the environment.

An example of a company, which implements changes in response to the environmental changes is an American company Cintas. It is a company, which through the development of logistics, technology and customer relations, adjusted its profile many times, in the period from 1950 to 2015. Its stages of evolution included: industrial rags, work uniforms, floor mats, first aid products, floor cleaning services, fire safety, and document archiving. It is not widely known what methods Cintas uses to maintain and strengthen its competitive advantage, however the method is not as important as the result. We can safely assume that Cintas does have a reliable Early Warning System. Cintas is an example of a company that carefully observes its environment and changes accordingly, at least it had done from 1950 until 2015.